As the government prepares to change the already robust ethical policies of the NKr1,945.8bn (€241bn) Norwegian Government Pension Fund – Global, Norway is set for a heated debate about responsible investments. Positive selection, earmarked investments to fight climate change and closer ties between corporate governance and exclusion are some potential additions to the ethical guidelines. The current guidelines have been in place since 2004.

“We’re not unsatisfied with our current guidelines, but want to remain in the forefront of ethical policies and that won’t happen without a continuous discussion about how we can improve,” says finance minster Kristin Halvorsen.

One of the key areas that will come under scrutiny is the structure between exclusions, decided by Etikkrådet, the ministry of finance’s Council on Ethics, and corporate governance, which is run by the manager that invests the assets, Norges Bank Investment Management (NBIM). The ministry of finance believes there are several indications that the current structure is not sufficient. It says communication and information is hampered by having two separate organisations for the different tools. Two separate mandates for exclusion and engagement have also led to different work methods and criteria.

Gro Nystuen, chair of the Council on Ethics, agrees that close ties between the two sides are crucial, but that there are also benefits of having separate structures.

“I also believe that it will be easier for Norges Bank to get companies to accept their demands if exclusion is a real possibility,” says Ms Nystuen.

Another potential change is to include positive selection to complement exclusion. Investment objects would then also actively be selected based on certain criteria, for example ‘best in class’ or specific focus areas. Previous reports have, however, not favoured positive selection, since it was believed to hamper the need for diversification and be detrimental to the fund’s aim of being a small investor in several different companies.

The ministry of finance has also said they will look into earmarked investments, where a per cent of the assets are dedicated to a sector or region, most likely in favour of environmental friendly technology or in developing countries. However, it remains firm that those kinds of investments would also need to bring in financial returns.

The recent changes in the fund’s investment strategy have also prompted discussion of how to deal with ethics in new asset classes and markets. The inclusion of new investment areas, such as new markets and property, may require a different ethical strategy, although the same ethical requirements apply for all asset classes. Earlier this year, it decided to start investing in property and include 18 new emerging markets.

Apart from the corporate governance activities and the exclusion of firms from the investment universe, there are also policies for negative filtration of weapon production. In addition, child labour and climate change have been singled out as two focus areas for the fund.

The discussion paper will be out on referral until September 15 and the government’s evaluation will be presented in its annual report to the parliament about the pension fund in spring 2009. The ministry of finance has invited several diverse organisations and authorities for comments, including universities, Amnesty and The Financial Supervisory Authority of Norway.

The results of the evaluation will not only have direct implications for the investments of the Norwegian Government Pension Fund – Global, but also significance for most other Norwegian pension funds and institutional investors, many of whom directly follow the state fund’s ethical decisions. The path chosen by the government is also likely to affect investors abroad. For example, the Norwegian fund’s exclusion of Wal-Mart was the direct reason that the Swedish AP funds decided to divest. The current evaluation of the AP funds’ ethics is likely to closely follow the Norwegian debate.

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